Thursday, May 10, 2012

If the market can’t allocate the unemployed to jobs, why not have the bureaucracy do it?

In a perfect market, a surplus of people with a given set of skills and experience (i.e. a particular “type” of labour) would cause a drop in the wage for that type of labour. The market would clear, and all members of that type of labour would find employment. So given a perfect market, there’d be no unemployment.

At least that would be the case assuming there is nothing of a macro-economic nature preventing full employment. E.g. let’s assume the above wage cuts result in instantaneous price cuts, which increases the value of the monetary base and national debt. That in turn means a rise in value of private sector net financial assets, which in turn raises aggregate demand. (That’s the “Pigou” effect.)

So perfect market = full employment. Imperfect market = unemployment. That’s the problem. Now for the solution – well, an improvement on the current situation anyway.

The market and the bureaucracy.

There are two ways of allocating economic resources: allocation by the market and allocation by the bureaucracy. Since the market can’t allocate the unemployed, what system should the bureaucracy adopt in order to do the allocation? How about this.

Assume that given a decline in unemployment, every employer would expand numbers employed in the same proportion. That is a crude assumption. But it’s very roughly correct.

So assuming the objective is to expand numbers employed by each employer in the same proportion, employers need to be told, “You can expand your payroll by X%, and the additional employers will be free. Moreover, this is something you really ought to do because your competitors will probably be doing it, which will cut their unit costs. I.e. if you don’t do likewise, your competitiveness will decline.”

Hey presto: unemployment falls.

Well that’s the theory. Now for the possible problems.

Would the free employees displace regular employees?

Obviously it’s impossible to guarantee that out of the millions of employers in the country there would never be an instance of regular employees being displaced.

But the more important point is to consider the main “overall” or macroeconomic effects. And the important point here is that the above mentioned rise in aggregate demand would mean that OVERALL, there’d be no net displacement. That is, on balance, there’d be a net rise in numbers employed. (Incidentally, in the real world, there’d be no need to rely on the Pigou effect: governments can of course raise aggregate demand whenever they want).

Moreover, there are several measures that can be taken to dissuade employers from using free employees as substitutes for fully viable employees. For example if the time that a given free employee stays with a given employer is limited to a few months, that induces employers to claim the subsidy only in respect of their LEAST PRODUCTIVE employees: no employer wants to lose their MORE PRODUCTIVE employees.

And finally.

And finally, smart readers will have noticed that the above system comes to the same thing as a “Government as Employer of Last Resort” system, of a particular type. It’s an ELR system under which the unemployed are allocated to EXISTING employers, public and private, rather than allocating them to SPECIALLY SET UP EMPLOYERS doing just public sector type work (which is what the WPA and numerous other ELR systems have consisted of).

In other words, the above is a piece of theory which underpins the idea: “allocate ELR employees to existing employers, public and private.”